Friday, February 23, 2007

Economic Sentiment

In today's NST, the prime minister said that the impressive economic performance of late is not artificial. Abdullah said the government did not artificially push up the Kuala Lumpur Composite Index and that the increase was gradual and not sudden. However, the prime minister did not mention why he was so sure that the KLCI will hit 1350 soon. Bearing that his statement is likely to fuel retail investors' interest in the stock market, the prime minister should take note that his statement is akin to an 'artificial' intervention of the KLCI.

On the total investment, he said both foreign and domestic investments had increased to give a combined figure of more than RM42 billion, the highest ever recorded. I checked with several financial consultants and got their feedback on the figures. They told me that the SKS refinery (owned by Syed Mokhtar - and his controversial Iranian connection) and two other petrochemical plants to be set up by Petronas accounted to almost RM15 billion of the RM42 billion (the earlier reported figure was RM46 billion).

According to them, it is safe to conclude that about 70 percent of the total approved investments will be invested. Hence, the projected total investment is RM29.4 billion. Minus the total investment with RM15 billion, we are seeing a net investment of RM14.4 billion. The RM15 billion investment in the oil and gas sector in 2006 is an exceptional one. Of the RM14.4 billion, about 60 percent comes from the E&E sector. This sector has posted an impressive RM281 billion out of the RM588 billion of total exports. Hence, RM5.76 billion of investment comes from other industries.

Another financial consultant told me that there has been a large inflow of money from the Middle East countries into our property market. From my conversation with them, a number of commercial complexes have been bought up by these funds. Although I do not have a precise figure of the inflow, it is obvious that when we start to itemise the total investments approved and actually invested the outlook may be completely different.

Yesterday, it was reported in both the Sun and NST that car sales for the corresponding period of January 2007 has dropped by 15 percent. Massive drop is recorded at the commercial vehicle sector. MAA attributed the drop to sluggish consumer sentiment.

The prime minister said that the strengthening ringgit is a good news. Two factors contributed to the rise in RM. First, RM is still considered undervalued and its appreciation would have been much earlier if not for the intervention of BNM for fear that an expensive RM may hurt exports. Second, foreign funds coming into the Bursa Malaysia obviously would need to convert their currency into RM. Alan Greespan called the euphoria of some stock markets an 'irrational exuberance' (thanks to Elanor who corrected me) which are seldom supported by real fundamentals.

A prominent retired civil servant I spoke to told me that the economy structure still remains the same. He wondered what the government has done in the short span of less than 3 months to merit a call that the economy has turned around.

Another ex-CEO and now a corporate coach told me that his team of CEOs especially those from the public listed companies are not focusing on the local economy. Most of them are shifting their resources overseas, which is natural, and looking for better yield and prospects outside the country.

Give it another 6 months and by the second half of 2007, the verdict will be out if the economy has really turned around.

If yes, the government should encourage employers to increase the salary of their workers as a gesture of their appreciation.


Elanor said...

One main point of agreement, and many ones that I disagree.

Main point of agreement - there is really no big change in the real economy. Financial market maybe, but definitely not the real economy. No sharp upturn or anything. Sustained growth is the theme. The driver of growth remains the domestic sector, namely household spending and heartening recovery in investment activities. All gradual, and has been happening for the past few years, not months. Global challenges are greater however, esp. with moderating US growth.

The only thing I see is really this:

Actual economy - stable
Official/Mainstream view - upturn
Informal view - downturn

It appears to me that the real reason ppl think the economy is not doing so well is because the government is saying it is not.

Maybe it is hip to be anti-establishment.

The rest:

1. There are different definitions of 'investment'. Note that the normally used 'investment' to reflect real economic activities (factory buildings, machinery purchase...) are defined in the System of National Accounts 1993 (SNA 1993), and is part of the GDP. The numbers mostly quoted however, are capital/investment/financial flows, defined in the Balance of Payment Manual 5th Edition (BPM5). Financial investment is not real investment.

2. The ex Fed maestro is Alan GreeNspan, and he termed the bubbly asset market conditions in the late 1990s as "irrational exuberance", not "essentric(sic) exuberance". I disagree with many of your points here - you might want to refer to this short and simple write-up by Stephen Jen FX analyst in Morgan Stanley:

Main point from Steve: Capital inflows now are benign and structural in nature. I believe that the types of capital inflows to Asia now are not as speculative and ‘short-termish’ in nature as the flows we saw a decade ago.

3. MAA sometimes make pretty unsubstantiated claims when it comes to economic matters. Car sales, ironically, can be pinned down to one major cause - lower car price. It might appear weird, but it is not. I might blog in this one day.

Really though, the economy is not about the stock market or figures you see released on newspaper. Ultimately, the economy is about you - regardless of what the bloomberg talking heads (google this) might say.

So ask yourself honestly, really honestly - has your economic life been made worse off compared to last year?


Khoo Kay Peng said...

Thanks for your views. I agree with you that real investment should be measured on the basis of production means and not on capital/financial inflows. Real investment should be able to create more employment opportunities and spill over benefits to other supporting industries. It is more helpful for the government to show us these figures.

I agree with you that the economy looks better in 2006 than 2005. In 2005, this region was recovering from the tsunami and other downtrends. However, I do not think it merits a call that the economy is upbeat - so said the government.

If you look at the private sector, most employers are still very careful. Most of them would rather give out a better annual bonus than to announce a salary increase. From the TEC survey (mentioned somewhere in my blog), salary increase varies around 5-10%. However, most employers announced a 1.5-2 months bonus.

On whether the economy life is better compared to last year, it is too early to tell. I would wait till the third quarter of 2007 to answer this question. I would also like to warn that election spending is not permanent. More than often these monies are spent on projects which do not translate into real economic benefits to the economy. Most of them are infrastructure projects. Granted that some are needed to fulfill social needs.

On your point that funds flowing into Asia now are not speculative. I cannot agree with you. Sorry, fund managers do not change their stripe overnight. Infact, since the financial crisis in 1997 how many Asian governments have really improve their corporate governance, capital market practices and forex management? In fact, many of us tend to believe that the spur of high growth will make many governments and investors forget about the lessons of 1997 financial crisis.

On the car sales, yes of the reasons is a sluggish second hand car market. Why is that so? Maybe you should ask yourself why suddenly the prices of second hand are not so good? Price = the balance between demand and supply. Who buy second hand cars? By reflecting deeper, you should be able to recapture your economics logic.

Is the economy better? Different people will tell you different thing because the economy is not that upbeat that some people would like us to believe. You are right. Essentially it is not about the newspaper report, it is about how much money in my pocket.

Workers in the private sector and the civil servants will tell you no..they are not better off because inflation rates on the ground is much higher than their salary growth.

Those in commodities will tell you that good times are back. Those in the construction industry esp. construction materials will tell u the same.

But what about retailers? traders? service providers?

Hence, I am going to say this again...focus on distributive growth.

Jeffrey, HL said...

The market is then way ahead of the economy. I certainly do not see signs of marked increase in economic activity. No wanted signs for factory workers, pinching of employees. (These may be masked by foreign workers, I am sure.)There are no signs of the economy picking up or overheating.

The market then needs to adjust itself to the real economy on the ground. As is the nature of economics, there are many ways to read into the story.


Elanor said...

Will be brief:

1. Investment (SNA-style) or Gross Fixed Capital Formation statistics are actually released quarterly by department of statistics and announced by BNM together with GDP figures. It has been showing uptrend, in terms of growth, since 2003 2H.

2. Car sales - lower car prices the second hand car market is an adjustment to demand-supply conditions, you are right, but NOT because demand is sluggish. NAP resulted in a drop in price in the primary car market which trickle to the second-hand car market. It is made worse that Malaysia has the highest car ownership ratio in the region, thus most car sales are on replacement basis and not new car basis.

Anyway, using Car sales movement as a sole indicator for demand condition might not be too comprehensive - why not just look at the domestic demand figures? I am not sure what defines 'sluggish', but growth of expenditure for households have exceeded the growth of income for the last 6 years, including 2006. By most considerations, spending faster than your income growth for more than a decade is not 'sluggish'. Private consumption IS showing sign of gradual moderation to be inline with income growth however, but i will call this 'prudent' instead of 'sluggish'.

3. Nominal income growth (10-12%) still exceeds inflation rates (3-4%) by far according to national statistics. Difficult for me to reach a conclusion that Malaysian households are having a declining standard of living. But you did mention "inflation on the ground" so I am assuming you do not believe in official statistics on CPI. Thus, argument will be difficult to proceed.

Anyhoo, all I am saying is, by most measurements, the economy is stable. Not accelerating like some might want us to believe, nor is it going into a recession any time soon.

Khoo Kay Peng said...

My response: I will be brief too.

1. Fixed capital investment is showing an uptrend since 2003 2H because post 1997 financial crisis, machineries and other capital assets have to be changed and upgraded. Hence, you see an uptrend. Second, if you look at the items, it is quite obvious that the oil and gas industry registered a significant investment in the last few years. The most exceptional is last year, almost RM15 billion.

But if you look at the job creation rates, it is growing at a slower pace compared on the rate of unemployment - see MOF report in 2006.

2. I agree that car sales is not a sole indicator. Even if the NAP resulted in a lower new car prices (subjected to non-CBU), if the market condition is really that good, many buyers will still go ahead and get a new car. If you talk to the new car dealers, which I did, they even gave out 0% interest payment for 2 yrs and more than RM10k rebate to compensate for a lower trade-in price. Still demand is slow. More so, car is becoming a lifestyle product.

I noted the trend e.g. higher expenditure growth compared to income. I am worried if you suggest this trend as a sign of consumer confidence. It reflects a few trends - slower income growth but higher inflation to rising cost of living/prices of goods. To sustain their living standards, most families have to dig deep in their savings or use bank credit (credit card). If you look at our saving rates, it has dropped significantly from almost 45% to 30-32%.

You obviously did not look at people at the bottom 40% as well. In the 9MP, their ownership of wealth dropped further fr 15% to 13%. In a society, there must be some income class who will continue to consume but overall well-being is reflected only when the consumption power of other classes show an improvement as well.

Domestic private investment is the most sensitive to local demand. It has dropped continuously.

3. As a policy analyst, I would like to accept the national statistics e.g. inflation rates of 3.3%. But my coffee shop bosses or food retailers or laundrette or hair saloon, car washers, toll operators etc. won't accept the 3.3% figures. Most of them tend to increase their prices by 10-30%. As a consumer, who should I believe? The official figures or the money I have to fork out whenever I consume?

If you want me to respond based on the 3.3% figures, I can understand why it is difficult to sustain this arguement.

I am glad that you and the people around you do not feel that your quality of life has deteriorated. But my friends, especially those with a big family do feel the inflationary pressure. School bus fare has gone up by RM10 per head. My friends living along the toll roads (including myself) do feel the extra pinch especially those without transport allowance. So, less entertainment, fewer visits to the restaurants and thus have to be more prudent (using your term).

Nope, the economy is not going into recession anytime soon. But we have a problem with rising cost of living and Malaysia being a cost competitive economy. Meaning slower income growth vis-a-vis spending growth. (like you have pointed out earlier)

Elanor said...

1. "Fixed capital investment is showing an uptrend... because post 1997 financial crisis, machineries and other capital assets have to be changed and upgraded."

- More than half a decade to recover from the slack in capacity? Hmmm, I doubt the veracity of such argument.

Real GFCF growth:
1996: 8.2%
1998: -6.5%
2000: 25.7%
2002: 0.3%
2004: 3.1%
2006e: 10.4%

Statistics seem to suggest recovery right after (and another slump during the IT bubble/SARS period), but the current path seems more gradual and structural rather than mere recovery and upgrade.

"Second, ...the oil and gas industry registered a significant investment... most exceptional is last year, almost RM15 billion.

Indeed the oil and gas industry benefited from the global scenario. However, total GFCF in 2006 is estimated (E-Report 2006, MOF) to be RM112.3bn. It was RM99bn in 2005. So according to your figures, oil and gas industry is about 13% of total capital formation. Sizable, but shouldn't really be considered the main player. In fact, according to BNM Annual Report 2005, manufacturing is 34% and services 26% of total private investment - mining, which include oil and gas, was about 16%. Investment growth seems more broad-based than you would like to believe.

"job creation growing at a slower pace compared on the rate of unemployment"

- I will respond to this once I get the economics rationale of this statement, although do note that unemployment rate has been stagnating at 3.5% for more than 1/2 a decade.

2. You said lower car sales signify sluggish demand, I said not really, demand is not sluggish, car sales is eccentric in nature during this period of time. Then I suggest to see consumption growth instead to gauge the topic at hand - demand condition. I said that consumption is still pretty robust, and growing above income in fact. I said a moderating consumption growth will be prudent.

Now you said I suggest that this is a healthy trend of consumer confidence. And then continue to say that this is a trend of rising cost of living. Phew.

- Okay, firstly this trend has been happening since 2001. Rising cost of living was not an issue then, and not so until very recently. How does your rationale explain the beginning of the trend?

- You should really look at the numbers:

Real Private Consumption growth:
2002: 4.4%
2003: 6.6%
2004: 10.5%
2005: 9.2%

Real GDP growth:
2002: 4.4%
2003: 5.5%
2004: 7.2%
2005: 5.2%

- How does consumption growth rate of 6-11% for the past few years signify erm... a response to higher cost of living? Difficult to grasp.

"If you look at our saving rates, it has dropped significantly from almost 45% to 30-32%."

- Which savings rates? Gross National Savings over GNP?
1990: 31.6%
1995: 35.6%
2000: 40.1%
2002: 34.8%
2004: 37.3%
2005: 37.0%

"Domestic private investment... has dropped continuously."

- Erm... you really need to check your statistics before quoting it.

3. This is getting too long to response to. Inflation rate of 10-30%? Okay, anecdotal and subjective observation at best.

- 1. With your allusion to toll roads and all, I am assuming you mean that this apply only to ppl in KL (1.5mn ppl) or the Klang Valley (6.5mn ppl), instead of the whole Malaysia (26.6mn). Fine, I accept our inflated sense of importance being citizens of Klang Valley.

- 2. Inflation rates relates to the increase in general prices. Prices of items are weighted according to their share in expenditure. Thus, an inflation rate of 10-30% (I'll use 20% for the ease of exposition) will mean an overall increase in price of 20% of everything we spend on in a period of one year, not just 4-5 items, eg:

a) Your electricity/water bill has increased from RM50 to RM60 while not using anymore litre of water or electricity

b) Your astro package price has increase from RM100 to RM120, without enhancement.

c) Your big Mac has increase in price from RM5 to RM6

d) Your Vios has increase in price from RM80k to RM96k

e) Your university fee has increased from RM10k to RM12k

e) Your haircut has increased from RM30 to RM36

f) Your bread has increased from RM2 to RM2.4

g) Your phone prepaid charge rate, incl. for SMS has increased 20% in price.

h) Your toilet paper price has increased. Shampoo, soap and all too, by 20%

g) Your computer CPU cost more now by 20%, with the same processing speed.

i) Postage now cost 20% more.

j) Your insurance premium.

k) Your internet connection charges.

l) Your RM10 movie ticket.

and so on....

Have all these happened all at once?

Your reasoning on economic matters remind me of John Kay's comment on DIY economics. Google it.

Khoo Kay Peng said...

Thks for your comments again. Like I said, it there will be no end if you interpret things your way and I see it my way.

You spoke of consumption growth. Yes, I agree that there has been growth but at which base line? But did you separate between public and private consumption growth rates? For the years that you have mentioned, public consumption was almost 10.2% per annum for the whole period of 8th MP. While private consumption hovered around 6.6% per annum.

Where did the private consumption go to? Reported in the NST today, sporting goods, gifts, toys, jewellery and fitness equipments registered the best growth of 10.7%. What about the consumption pattern of the lower 40% whose share of GDP had shrunk?

Private consumption growth of 6.6% is not that great for a developing economy. China's is almost 12%.

I am definitely surprised if you think the consumption growth rates are attributable to real consumption i.e. more money spent = more access to goods and services. There is an element of higher prices which pushed up the consumption figures (RM denominated anyway).

I may be wrong on the saving rates but look at your own figures. It did not show an uptrend after year 2000. Did you look at the growth rates of consumer credits (bank loans, credit cards?). Any how many percent of the population contributed to the 37% savings?

"Fine, I accept our inflated sense of importance being citizens of Klang Valley."

This is the most insensitive statement you can make here. By the way, many urbanites in Klang Valley are the most at risk when prices go up or when inflation is up. There are many vulnerable groups here who are earning above the poverty line of RM639 but not enough to live decently. Any many do not enjoy the list of items you listed here - me included. Just go your regular hawker centres, neighbourhood shops, wet markets and find out about the prices now and six months back - I assume that you do patronise these places.

The prices did go up during the cut of oil subsidy, increase in utilities tariff and toll rates. Mind you, many retail shops, laundretter, services and F&B outlets including hawker stalls did increase their prices over 1-2 weeks period.

Lets talk about products and services that are consume daily by the people.

And lets take income groups differentiation focus in your analysis.

Instead of accusing me of being a privilleged Klang Valley folk, you sound like more like one yourself.

Ask the salaried workers whether their living standards has gone up? Why don't you try that?

Forget about John Kay and what he has to say. I am interested in reality. What is really happening on the ground. I am concerned about the growing income/wealth inequality in our society. A generic viewpoint only serves the purpose of those who think that things are alright and we do not need to change.

I will tell my char koay teow seller, my laundrette, my kopi tiam tauke, my regular mamak shop etc. that they should not increase their prices because according to my economist friend the real inflation rates are anecdotal and subjective observation at best. This way, my ringgit can be streched longer. I am not sure if they will agree with you.

By the way, I do not need to be subjective here because I am a consumer. I have to pay to get my plate of chap fun (economy rice) or char koay teow (by the way went up from RM3 to RM3.50).

And third year running, many of us do not enjoy a salary increase. Even if there is any, not more than 5%. Maybe you are luckier.

Are you kidding me to suggest that these are plain observation?

Elanor said...

Dear Kay Peng,

I am trying not to be personal, but I am not luckier. Based from the average household income in KL in the 9MP, I am below average, so stop accusing me of being lucky. What I am trying to do is to look at things objectively and honestly.

Ask yourself, how much a month do you spend on your char kuey tiew that has increase 50c? Weight that portion, and how much has your expenditure increased? You have done economics, you know how a lespayres weighted index works.

Secondly, besides perhaps a Vios and a 100 bucks Wah Lai Toi Astro package, I am sure the things I listed is not luxurious. Heck, I even thought those things are not, seeing how you can almost always see a (or many) Vios on the road. I do have a WLT Astro package, I admit - for my aging retired mother.

Thirdly, I can't argue with your subjective rhetoric on the cost of living. Just be truthful to yourself on your real standard of living.

On the statistics and others:

1) I used real private consumption growth - read again. And real as in constant prices, not current prices, that is inflation adjusted, that is price valuation effect removed. As someone who studied economics, I am sure you know this.

2) Loan figures - check out the latest monthly statistical bulletin from BNM, and check out the growth in deposit rates in 2006. The build-up in household debts are due to a lot reasons, and one can point to low interest rates as one.

3) Comparing growth rates of countries with different level of development? Sigh. I admire China's development model, I blogged about it. But to compare growth rates of vastly different absolute level is just plain misleading.

4) What is my say on inequality? You made it seems I am privileged - I am not, I have much to say about spreading the opportunity of economic growth - again, I blogged about this in my post on 'equality in poverty' series.

5) You also assumed, by the fact that I refute your statements on economics, that I am inherently not wanting to change, and I thinks things are rosy. That is the furthest from the truth - I am refuting your statements because they are either wrong or misleading. And my stance on things are clear if you read my blog, the standard theme being "Malaysia must embrace change".

6) Savings rate was down in 2000 because of low GNP, not low GNS. In this country, the worry of economists is not GNS is low, but rather why Investment is not as high. Same theme in the region too, resulting in bulging current account balance.

7) It is sad that when one provides objective view, you accuse them of being not living in reality.

This is your blog, and I respect your domain over it. And truthfully, I enjoy your insightful political commentaries. That is why you are on my RSS reader. The only reason why I am commenting on your blog is because your economics rants are very weak on many counts, from quoting statistics to linking events and rationales. It reflects badly on the blog and does little justice to your non-economics entries.


ps: You should really really really check on the definitions of different statistics before saying they are unreliable. These definitions are readily available. On your later post on MITI and UNCTAD numbers, they report very different things. For one, UNCTAD number are based not on final 2006 figures (it is not out yet) and done on BPM5 basis. MITI approval figures on the other hand, measures foreign investments differently, application-wise on project-to-project basis, and most of these projects have implementation periods spanning more than 1-year, and only for the manufacturing sector. It is like comparing apples to orange.

By saying this, I am NOT SAYING we are all ROSY and need not CHANGE. We definitely should not lose out further in attracting purposeful foreign investment, in fact, we should refine most of our industrial policies. But by combining both this message on your entry, AND a sloppily researched accusation of statistics conspiracy, the integrity of your post is definitely undermined.

Khoo Kay Peng said...

Dear Elanor,

I did not say that these figures/statistics are false. E.g. my Malaysiakini article response to the Deputy Minister of MITI. YOu are an econmist. You should understand that different interpretation of the statistics will paint you different stories.

And economist or statistics alone does not have all the answers to our socio-economic woes. These statistics are mere indications.

To ask myself honestly? Yes, I am not looking at the whole issue on the pretence of an economist. I am more of a political analyst and a biz consultant than an economist. So I look at the whole economic situation from the viewpoint of a layman who is affected by the current economic condition.

My life did not get any better but worse perhaps after the recent price hikes. Two biggest items are my food/accommodation bills and car payment (including petrol and tolls). My salary did not increase for the past 3 yrs. Like many other young professionals, I would like to explore a better career option too. If you are doing the same, you should be able to gauge the opportunities we have in Malaysia. I was there in the job market during the good times. I can see the difference.

You blog on the economy as an economist, I supposed. But I blog as a layman affected by the rising costs. And I would be the first to tell the government if my life is really as good as they claimed. The coins do not jiggle in my pocket.

Yes, I would like to stop arguing on rhetoric and theories. Either one of us being right or not will not change my living condition. I am a practical person. Like you said, the most important thing is the amount of money in my pocket.

You are not alone with an elderly mom.

Perhaps you are better at quoting statistics and relating them to the right examples. Congrats! But I am not here to compete on who's better at doing these things.

I am here lamenting over the government's claim that the economy is robust and wondering why my cake is not getting any bigger.

How honest you want me to be? Show you my bank account balance at the end of each month? Provide you with a list of my expenses?


Will these posts do less justice to my other posts? What do I care if I am one of those who are not benefiting from the euphoria?

Elanor said...

Dear Kay Peng,

My question on honestly asking yourself is rhetorical. In any case, I wish you all the best in your future undertakings in your career.

As usual, I will look forward to reading your political commentaries, on your blogs or otherwise.


ps: Check out the stock market today, no euphoria anywhere. Global waves still dictate our equity market activities.

Mat Merah said...

The debate and facts and figures are thoroughly enjoyable. Thank you, Khoo Kay Peng and Elanor!

Especially Elanor! Good stuff! Good to see some logic working.

Dek Mat said...

wow! mat merah asked me to pop over here to read the comments exchanges and damn i've learnt a lot today.

great stuff guys i hope that you won't stop commenting elanor, if you do we won't learn twice as much!

I said this earlier but hey great stuff!!!

zewt said...

quite an argument you having there.

one thing from tony pua which i find really true.... the govt claims that the stock market is up by 30% and it's a strong sign... well, did i salary increase by 30%?

Khoo Kay Peng said...

Diversity of opinions is tolerated here. Elanor is better at figures and stats, no doubt. I hope to offer a practical view of the socio-economic and political issues.